What future for the price of food?

Sensemaking / What future for the price of food?

Fiona Harvey argues for better cooperation among suppliers, traders, commodity markets and consumers.

By Fiona Harvey / 02 Apr 2015

2014 was a volatile year for commodities across the globe. The big news was the unexpected fall in the oil price. By December, both US and Brent crude had hit their lowest prices since the summer of 2009.

Other commodities also fell, on poorer economic news from China. History shows that oil price spikes and falls can precipitate widespread economic slumps, as with stagflation in the 1970s, and even cause the downfall of empires, as with Russia in the late 1980s. The effects of the oil price falls are yet to be fully felt, and the shale gas boom in the US has made the macroeconomic effects even more unpredictable. But one immediate effect was a fall in food prices.

In May last year, the World Bank warned that food prices had risen for the first time in more than two years, reversing what had seemed to be a downward trend. This could presage serious problems for the world’s poor, the organisation warned, citing the food riots in 2008. But by September, this new development had itself been reversed, and food prices had fallen by 6%.

Food prices and oil prices are not always linked, though the cost of fuel is an important input price for farmers and for transporting goods to market. But there is one sharp difference between the two: oil price falls benefit all those who depend on the fossil fuel, which includes most of the poor around the world, while oil price rises tend to benefit only a few oil-rich countries, where wealth tends to be concentrated in a small number of hands. By contrast, while falls in food prices can help the urban slums, they also harm billions of the world’s poor: those who are farmers and food producers.

In other words, food price rises and food price falls can both be regarded as a calamity.

In 2014, this prompted the World Bank to develop a brand new service: the Food Price Crisis Observatory. According to the Observatory, global food prices hit a 4-year low in August 2014, mostly because wheat and maize prices fell by a fifth. However, rice prices rose by 13% between April and August. Ana Revenga, senior director for poverty at the World Bank, said: “Such a sharp decline in international food prices is welcome, especially given the increases we’ve seen recently. However, as food prices continue to fluctuate and the most vulnerable are faced with new and growing concerns, it is essential to have the tools in place to act quickly if and when food price crises unfold.”

Some of the rises in food prices in recent years have been blamed by the United Nations on speculators. These are traders who never own the product they trade in, but profit from buying it one place or at one time and gambling that before it has decayed it can be resold at a profit. Technology has enabled speculators to play a major role in agricultural markets, by enabling near real-time trading, responding to minute-by-minute changes in weather, demand, input costs and other critical circumstances. So what would happen if speculators were removed from the supply chain?

One project considering such a question is Tea 2030, initiated by a group of tea producers and Forum for the Future in 2013. As part of the project, tea companies are working with retailers, producers and intermediaries in order to develop a more sustainable way of making tea, from bush to cup.

Importantly, Tea 2030 recognises that there is no single correct model for trading in future, but a variety of possible mechanisms. The report notes: “One possible development is a move away from an auction system towards participation in a futures market at national or international level – or simply a move towards more online-based trading systems. Many incumbents within the tea sector resist what they view as the ‘commoditisation’ of tea and the problems it could create, such as exacerbating price volatility. Others feel a change in the market is inevitable. Different models have been experimented with in the past, but new technology and new markets may make a different system for trading tea more viable in the future.”

This could encompass everything from direct relationships from supplier to consumer, perhaps starting at the luxury end of the market where growers can boast of “single estate” status in the same ways as fine wines, but this could extend to sustainability-conscious consumers who could in the future be offered teas from particular suppliers according to their environmental practices. E-commerce, and the take-off of the mobile internet in developing countries, mean such one-on-one selling to be done now at low-cost, with transport and shipping networks the main obstacle.

But even in a world of direct relationships there is still likely to be a role for trading exchanges.

Futures trading systems can be a boon to farmers, because of the inherent risk in growing crops: harvests can be affected by weather, disease, natural disasters and the like, and bumper harvests can be just as difficult to deal with as busts, because of the depressing effect on prices. The concept of “hedging” against risk got its name, according to stock market legend, from farmers in the US, who wanted funds to advance them money based on their harvest expectations, but with mechanisms to mitigate their exposure to debt if the harvest failed or was disappointingly priced. These funds were nicknamed “hedge” funds from their agricultural origins, and the rest is financial history. Hedge funds have developed so as to be almost unrecognisable from their origins, but the principle that started them remains strong.

There are sectors beyond agriculture where seismic shifts in the way commodity markets work are likely to take place. Jeremy Rifkin, economist and author of The Third Industrial Revolution, identifies energy supply as one key area. Instead of the pattern which has prevailed for more than a century, in which the mass of consumers are served by a small number of suppliers through a giant electricity grid, the spread of renewables and smart grids will allow consumers to be producers as well, changing the dynamics of power forever. “In the 21st century, the locus of control over energy production and distribution is going to tilt from giant fossil fuel based centralised energy companies to millions of small producers who will generate their own renewable energies in their dwellings and trade surpluses in info-energy commons. The democratisation of energy has profound implications for how we orchestrate the entirety of human life in the coming century. We are entering the era of distributed capitalism.”

Whatever new market systems are developed, or old ones re-purposed, one thing is certain: the most sustainable future lies in better cooperation among suppliers, traders, commodity markets and consumers. Only if environmental and social goals are built into the systems will they deliver a sustainable outcome. As Pier Luigi Sigismondi, chief supply chain officer at Unilever, put it in the context of tea: “A thriving tea industry needs to be an economically, environmentally and socially sustainable industry. But nobody can do this alone. It’s only through collaboration that we can build a more sustainable future and improve the livelihoods of the millions of people who depend on it.”

The same can be said of any commodity we produce.

Fiona Harvey is an award-winning journalist specialising in the environment.  

Image credit: Lars Plougmann / Flickr

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